Money and property rights
By J. Bradley Jansen and Matt Sekerke
web posted March 11, 2002
An important test faces Congress and President Bush: Will we
move back toward the Rule of Law and respect for contracts
and property rights – or does our government still not know
what the meaning of "is" is? Whether or not they abide by US
law and oppose International Monetary Fund efforts to use our
taxpayer dollars to reward theft through the voiding of
Argentina's monetary contract will be a key harbinger. The other
option is to encourage Enron-style financial incentives for fraud.
When Argentina's president Eduardo Duhalde unilaterally
abandoned the currency board monetary system and devalued
the peso, he hurt American and other investors. Under a
currency board, notes and coins are fully backed by assets in a
foreign anchor currency and are fully convertible into the anchor
currency at a fixed exchange rate on demand ("Should
Developing Countries Have Central Banks?" by Kurt Schuler,
Institute for Economic Affairs, 1996). Thus, a currency board
provides a guarantee to a noteholder: He or she may always
exchange the note for an equivalent amount of the reserve
currency.
Even the IMF has lauded the guarantees of currency boards,
"Demand is higher for a ‘currency-board currency' than for
currencies without guarantees because holders know that, rain or
shine, their liquid money can easily be converted into a major
foreign currency" (http:
//www.imf.org/external/pubs/ft/fandd/1999/09/gulde.htm). There
was no IMF doubt that currency boards provide a contractual
guarantee for investors.
The good news is that Americans as taxpayers should not
support a government that steals money from Americans as
investors. U.S. law (Title 22, section 2370a) clearly says, "The
President shall instruct the United States Executive Directors of
each multilateral development bank and international financial
institution to vote against any loan or other utilization of the funds
of such bank or institution for the benefit of any country" that has
expropriated the property of any U.S. person, nullified any
contract with any U.S. person, or taken any other action which
has the effect of seizing ownership or control of the property of
any U.S. person. The provisions apply until the country in
question has made restitution or has provided for a suitable
remedy such as arbitration under international law.
The only question now is whether Congress and the president
will uphold U.S. law or permit US taxpayer money to the IMF
to reward thieves. Lawmakers should also focus on the IMF's
failure to identify the sources of the crisis, and their role in
sanctioning the events that led to it.
From April 1, 1991 to January 6, 2002, Argentina's central bank
employed a currency board-like system called convertibility
which maintained a fixed exchange rate of 1 peso to 1 US dollar
by holding US dollar reserves equal to outstanding peso
monetary liabilities. Investors put money into Argentina under
those clear, legal conditions.
When Domingo Cavallo became Economy Minister in March
2001, he introduced a series of measures which put the currency
board guarantee in question. Markets interpreted these
proposals as preludes to devaluation, pushing interest rates up
and driving capital flight from Argentina. As confidence in the
Argentine system deteriorated, the IMF should have encouraged
Argentina to restore credibility by either adopting a more
orthodox currency board or by officially dollarizing. The IMF did
neither. In fact, as events unfolded, they did exactly the opposite.
The panic began on April 17, 2001, when Cavallo proposed
substituting euros for half of the reserve backing of Argentina's
currency board-like system.
The IMF did not react.
On May 21, IMF Managing Director Horst Köhler said he
welcomed Argentina's efforts for a debt swap it claimed would
support medium-term financing sustainability. Eleven days later,
Minister Cavallo engineered a swap that obliged Argentine
banks to exchange relatively good, liquid government bonds for
new longer-dated, illiquid paper. The central bank was obliged
to inject liquidity into the banking system (a feature which is not
present in orthodox currency board systems), which greatly
expanded the monetary base and reduced dollar reserve backing
of the currency below 100 per cent for the first time.
Soon after, on June 15, Minister Cavallo announced a dual
exchange-rate regime: one for imports and another for most
exports. When markets worried again about devaluation, interest
rates spiked and capital flowed out of Argentina. A week later,
IMF Director of External Relations Thomas Dawson told a press
conference that the IMF continued to support Argentina's
efforts.
By September 7 last year, three events had occurred, with the
IMF's approval, which seriously compromised the credibility of
the convertibility system. Predictably, this did not stop the IMF
from augmenting Argentina's stand-by credit to $21.57 billion.
IMF First Deputy Managing Director Anne Krueger appeared
utterly oblivious in a press release, saying: "The [new Argentine]
program aims at restoring the credibility of the fiscal position and
the convertibility regime."
At the end of November, Mr. Cavallo further undermined the
convertibility system by requiring banks to exchange treasury
bills for illiquid new ones. As a result, banks could not meet
demands for deposit withdrawals, so he instituted restrictions on
deposit withdrawals and transfers of funds abroad. A week later
Thomas Dawson informed us "there is no Fund staff view on the
subject."
Dissatisfaction with these measures led to rioting and a revolving-
door political crisis, producing five presidents in two weeks.
Eduardo Duhalde became Argentina's fifth president on January
1, 2002, and ended convertibility five days later. He broke the
monetary contract and created a new exchange-rate regime
which stole about 40 per cent of the value of the peso—similar
to FDR's breaking our domestic gold standard contract and
devaluation.
This ended the legal right of people to convert pesos into dollars,
amounting to outright theft of the central bank's foreign reserves.
Duhalde's administration proceeded to violate contracts with
foreign companies, steal the dollar deposits of Argentines, and
wreak havoc on the banking system. Since Argentina's
devaluation, all eyes have been on the IMF to come to
Argentina's aid. And the Duhalde administration is already
penciling in a bailout package to support its budget.
The Congress must demand that President Bush follow the law
and oppose any new IMF lending to Argentina until it honors its
contracts. They should also oppose additional disbursements to
the IMF based on the IMF's failure to respond to the unfolding
crisis. If the IMF cannot focus on basic contracts, property rights
and monetary stability—instead of its new pet projects of higher
taxes and less financial privacy—taxpayers would be better
served if we gave our notice of withdrawal to the IMF and put
our returned deposits to better uses.
J. Bradley Jansen is Deputy Director of the Center for
Technology Policy of the Free Congress Foundation (http:
//www.FreeCongress.org). Matt Sekerke is a Research
Associate at the Johns Hopkins Institute for Applied Economics
and the Study of Business Enterprise.
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